Are Fund Managers Finally Going to Beat ETFs in 2014?

By Brendan Conway

The chorus on Wall Street is that conditions are finally right for stock pickers to beat the index in 2014, reversing several years underperforming indexes and ETFs.

Before you scoff, here’s the thing. The best data on the subject show that many active managers are already there. Many laggardly track records have seen a reversal.

Anecdotally, you might have noticed American Funds’ Growth Fund of America (AGTHX) edged out the S&P 500 for the second straight year, after trailing in three of the previous four. The same thing happened in Janus Contrarian fund (JACNX).

Nearly half (45.7%) of U.S. domestic equity funds beat the S&P Composite 1500 in the year through June 30, according to S&P Dow Jones Indices’ S&P Indices Versus Active scorecard, or SPIVA. That’s more than twice the three-year beat rate (21.1%) and a significant improvement over the five-year rate (27.9%). A year earlier, the mid-2012 check showed just 10.2% beating.

Some manager categories that got murdered on a relative basis since the financial crisis have recovered. Large-cap core fund managers are a notable example. 46% of them beat SPDR S&P 500 ETF (SPY) in the year through June 30. For the five-year period, only 16.5% did.

This isn’t as unusual as index dogmatists might suggest. Active managers have turned in selected periods of outperformance even in periods when you’d think indexing would be pulling far head. For instance, in SPIVA’s mid-2010 check, 46% beat.

Here’s a test: When was the last year the majority of fund managers beat the S&P 500?

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.